Is an SBA 504 Loan Right for Your Business?

The Small Business Administration (SBA), in conjunction with your bank, offers a number of loan options to help start, build or grow a business. One of these is the SBA 504 program, which is used to finance fixed assets like commercial real estate and industrial equipment. A benefit of the SBA 504 loan that’s most attractive to business owners is that this particular loan type requires as low as 10% equity down, compared to 25% or 30% typically required for conventional financing allowing the borrower to preserve capital for other business needs.

If you’re looking into building or renovating a facility or purchasing equipment needed to expand or improve your operations, an SBA 504 may be a good option for financing.

What criteria are used to qualify for an SBA 504 loan?

There are a number of criteria – that must be met in order to secure SBA 504 financing. First, the type of business you run will determine eligibility. There are a few that are not eligible. Visit SBA’s website here to see the guidelines.

If a business meets eligibility criteria, there are still a few restrictions regarding how you’re able to use the loan proceeds. For example, a 504 loan cannot be used by a business to purchase inventory or to infuse general working capital. (We will cover SBA products for those situations in an upcoming post.) Here are a few more guidelines set by the SBA specifically for a 504 loan:

Established businesses must have a tangible net worth of less than $15 million, and an average net income of less than $5 million after taxes for the preceding two years

SBA does not extend financial assistance to businesses when the financial strength of the individual owners or the company itself is sufficient to provide all or part of the financing. Both business and personal financial resources are reviewed as part of the eligibility criteria. If these resources are found to be excessive, the business will be required to use those resources in lieu of part or all of the requested loan proceeds. If the money is to be used to build a facility, the borrower (or borrower controlled LLC) must occupy at least 51% of the building

Both established and startup organizations also must demonstrate the ability to repay the loan based on projected operating cash flow of the business. Startups must go further to show evidence of relevant management experience and a sound business plan that indicates growth potential.

Benefits of the SBA 504

One reason so many small businesses take advantage of the 504 loan for buildings and equipment is because of the interest rate protection. With a long-term fixed rate on 40% of the debt, borrowers are protected against rising interest rates. This gives business owners peace of mind as they have more control over their long-term interest expenses.

SBA loans have helped small businesses of all types build and continue to thrive. There are additional SBA loan types, and if the 504 isn’t aligned with your situation or needs, we’ll discuss alternatives in our next post. In the meantime, if you have questions about financing for your business, don’t hesitate to reach out to Investors Community Bank. Our small business experts would be happy to share their insights!

Laurie has been in the banking industry for more than 25 years, focusing primarily on small and medium-sized family-owned businesses in northeast Wisconsin. She has valuable experience helping companies secure the appropriate financing to support their goals.

Views provided in this blog are general in nature for your consideration and are not legal, tax, or investment advice. Investors Community Bank (ICB) makes no warranties as to accuracy or completeness of information, including but not limited to information provided by third parties, does not endorse any non-ICB companies, products, or services described here, and takes no liability for your use of this information. Information and suggestions regarding business risk management and safeguards do not necessarily represent ICB’s business practices or experience. Please contact your own legal, tax, or financial advisors regarding your specific business needs before taking any action based upon this information.